Understand Your Liability as a Loan Guarantor
Becoming a loan guarantor is different from just signing as a witness. It puts you directly under the liability to repay the loan in case of default by the primary borrower.
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Being a loan guarantor of a personal loan taken by your friend or family member, puts you directly under the liability to repay the loan in case of default by the primary borrower. Becoming a loan guarantor is different from just signing as a witness. It entails a huge responsibility to payback the debt.
Many a times, out of courtesy or friendship, individuals become loan guarantors. However, in the event of bankruptcy or default by the person who took the loan, it is often the loan guarantor who is caught unaware.
As mentioned by RBI, according to Section 128 of the Indian Contract Act, 1872, "the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Therefore, when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surety even without exhausting the remedies against the principal debtor. As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter."
Which means that the onus of paying the loan amount back to the bank lies on the shoulders of the loan guarantor too as much as it lies with the principal borrower.
If the principal borrower defaults on the loan then it affects your credit score too as a guarantor.
Additionally, if you are a bank loan guarantor to a friend or family member, then in the event when you want to take a loan for yourself, your bank will consider that bank loan too while calculating your borrowing capacity.
Thereby, if you are planning to take a loan for yourself in the near future, then you must stay clear from becoming a loan guarantor for someone else.
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